Verdict puts brand in crisis

Fallout: Opinions are mixed over whether Stewart's troubles will derail her company.

March 06, 2004|By Lorraine Mirabella | Lorraine Mirabella,SUN STAFF

Martha Stewart's conviction has cast a long shadow over the future of the company that bears her name.

Shares of Martha Stewart Living Omnimedia Inc. lost more than 20 percent of their value late yesterday as investors reflected on how a guilty verdict could taint her lifestyle empire. Stewart was convicted on charges of obstructing justice and lying to the government about a stock sale and could face up to 20 years in prison.

"The verdict was worse than expected, and I was negative on the company's prospects regardless of the verdict," said Dennis B. McAlpine, who follows the stock as managing partner of McAlpine Associates LLC in Scarsdale, N.Y.

McAlpine has had a "sell" recommendation on the stock for several months because of declining advertising and newsstand sales of the company's magazines, including Martha Stewart Living.

Earlier this week the company reported its first annual loss. Revenues from publishing, which account for 60 percent of sales, fell 28 percent in the fourth quarter.

Stewart, who owns 61.2 percent - about 30 million shares - of her multimedia empire, has already seen her personal stake in the company drop about $250 million to about $326 million.

Within an hour of the verdict, the board of Martha Stewart Living Omnimedia Inc. released a statement saying it would "meet promptly to carefully evaluate the current situation and take actions as appropriate. In the meantime, we are confident that our assets ... are more than sufficient to continue MSO's development as a leading "how to" brand building company."

Some faithful shoppers at the Big Kmart on Baltimore's Wabash Avenue where Stewart's products are featured said they would continue buying her things regardless of whether she goes to prison.

"If you're driving a GMC car and the president of GMC gets arrested, you're still going to drive that GMC car," said Adam Roberts, 36, a New Yorker who left the city yesterday to visit family in Baltimore. "People are going to keep buying her stuff as long as it's quality stuff. I didn't think she would get convicted," Roberts said.

For years, Constance Stokes, a Baltimore City schoolteacher, has watched Stewart's show and purchased her towels, lamps, dishes and cookbooks. Recently, she bought $600 worth of Stewart's line of lawn furniture. A conviction won't stop her from buying more Martha-ware in the future.

"There are people out there who have done far worse," said Stokes, 59, who was picking up dog food at the Kmart. "It seems unfair. If I had stock and my stockbroker called me and told me to sell, I'd probably sell. I hope she comes out of this OK.

"I feel bad for her," Stokes said. "Even her friends turned on her."

Many of the Kmart shoppers said the famous homemaker was unfairly prosecuted. Most women said Stewart had two strikes against her heading into the trial: She's a successful woman, and she's famous.

"Because she's a woman, they made an example of her," said Ada Emanuel, a 74-year-old Pikesville resident. "I don't think she's guilty."

"That trial was a waste of taxpayer money," said Joyce Barnett, 64, of Lochearn. "They went after her because they were making a big name for themselves. They wanted to say, `Hey, we got Martha Stewart.' It was wrong to convict her."

Others were more skeptical

Vernard Winslow, who was shopping yesterday for a computer desk, said that he thought Stewart was "probably guilty" and that the conviction will tarnish her company, her products and possibly Kmart.

"It's unfortunate for her, but I think other entrepreneurs will step up into that role to push their own products," said Winslow, 40. Her possible prison term "opens the door for other entrepreneurs. I don't think [her gender] had anything to do with it. She's just a hard-core business person like Donald Trump."

Indeed, one recent consumer survey showed that Martha Stewart's "brand negativity" had climbed to at least 33 percent, said C. Britt Beemer, president of America's Research Group in Charleston, S.C.

"What that means is a third of America or more will not buy her products," Beemer said. "At this point, I think it's pretty sure that her brand has taken a major hit. It's not just a verdict against Martha Stewart; it's a verdict against an entire company - which does a better job of knowing the attitudes of females than anyone in America. But people can't separate the two.

"It's her face, it's her persona that's on everything. If she does go to jail, then her brand negativity will be 50 percent, and at that point there won't be a brand left," Beemer said. "

Terrence MacKay, a Chicago-based analyst at Morningstar who covers Martha Stewart Living, noted the company built its competitive advantage on the personality of an individual.

"This trial, this verdict cast such a veil over this personality that it damages the competitive advantage and the business model," MacKay said. "Does the verdict sink the company overnight? Probably not."